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3 - Duopoly and strategic price making When the market is dominated by a few large firms, the market structure is often described as an
3 - Duopoly and strategic price making When the market is dominated by a few large firms, the market structure is often described as an oligopoly. Oligopoly firms make price and output decisions strategically by taking into account their opponents' anticipated reactions. The following question requires you to consider the strategic decisions of a duopoly. Imagine two big supermarketsColemart and Woolmartare selling similar grocery products. If they compete by charging a lower price, they will each make a profit of $2 million. If one supermarket raises its price, it will lose customers to the other and make a smaller profit of $1 million, whereas its competitor earns a bigger profit of $4 million. However, if both supermarkets charge a high price, they each earn a big profit of $3 million. i. Draw a payoff matrix to represent this duopoly game. What is the likely outcome of the game? What is the best outcome from the supermarkets' perspective? (5 marks) ii. Based on your reading of the articles, is the outcome of the game in (i) an accurate prediction of the real-world situation? If not, why? (2 marks) iii. How can both supermarkets raise prices on groceries and make big
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